About Me

Thursday, November 17, 2005

From my readings of the 3-weeks riots in France, the usually-mentioned culprit for the anger by the rioters are: (a) the police's racism, arrogance and brutality to immigrants of African and Arab/North African origin; (b) high unemployment among immigrants, up to 40% or 4x the national average of 10% (and France has this 10% average unemployment rate for the last 30 years or more!), and (c) bad social conditions (housing, discrimination in work if ever employed, and so on).

The problem with the French police is an issue that can be addressed by Interior Minister Sarkozy and the police chiefs. The problem on unemployment and social discrimination I think, can be rooted to a "crisis of welfarism", of high expectations of welfare, and continuing disappointment of high taxes and over-regulation of business to maintain welfarism. This is a problem that has finally caught up with France, could spread to other European welfare states. Though France's situation is more unique and pronounce by virtue of its being a strong colonial power in the past.

France colonized dozens of countries in Africa; it even had colonies in Asia before -- Vietnam, Laos, Cambodia. When colonization officially ended, tens, hundreds of thousands from each of its former colonies went to France (especially the fallen rulers?). The migrants settled in France, produced offsprings who are France-born, expecting that they be entitled to the same welfare benefits as the "real" French, them white people with blue eyes, unlike them darker skin with black eyes and kinky hair.

But France's welfarism is already overstretched. Its budget deficit always exceeds 3% of GDP every year, a problem it shares with Germany and Italy and which angers many smaller countries in the EU who struggle hard to keep their budget deficit below 3% of GDP. France's public debt comprises 66% (or 2/3) of its GDP as of 2004 (data from IMF, World Economic Outlook 2005). And the unfunded liabilities of the social security system is estimated to be around 200 percent of GDP. The expenditures for public welfare, farm subsidies and other services always exceed tax collections and other revenues. And rightly so since France's taxes are among the highest in the world. Top marginal income tax rate is 48 percent, add in payroll taxes and productive citizens pay as much as 65 percent of their income in taxes. Who's happy surrendering 2/3 of his/her monthly income to the government? The top corporate tax rate is 34 percent and value-added tax (VAT) is around 20 percent.

A Frenchman friend told me that while many productive French people are leaving France, went to UK, US, Eastern Europe, other smaller-taxes economies (well, at least compared to those in continental European countries), the population of its welfare-dependent citizens and migrants continue.

Another problem of welfarism is over-regulation of labor laws, business and entrepreneurship. To hire employees means: (a) lots of additional fees to pay (workers' health insurance, unemployment insurance, etc.); (b) workweek is only 35 hours; (c) mandatory paid vacation leave is 5 weeks; (d) family and maternity leave is 36 weeks; and (e) it's very difficult and bureaucratic to lay off or fire employees. If you are an entrepreneur and faced with such rigid labor laws, while business and personal taxes are high, why hire more people? Better do it yourself, or move your shop or factory to Eastern Europe or Asia or the US where taxes are smaller and labor laws are less rigid. This largely explains for the high unemployment in France, Germany, Belgium, Spain, Italy, other European countries.

So, the cycle of high expectations of welfare and disappointment with high and multiple taxes and rigid labor laws is a trap that sustains discrimination and high unemployment. Now, if my hypothesis (ie, being a hypothesis, subject to test by facts and counter hypothesis and theories) that this is a "crisis of welfarism", then the current riots is one slam-dunk proof against socialism-inspired policies of the French government. The free-market system of less government intervention, less bureaucracy, less taxes, more entrepreneurship and more individual responsibility, is an old idea that continues to elude the political leadership of France and many welfarist countries.

The upcoming WTO Ministerial meeting in Hong Kong could be one opportunity for the high welfare, high agricultural protectionism countries, to slowly go back to the free market system. Simply slashing high farm subsidies, and slashing the high taxes that finance such huge farm subsidies, would provide justice not only to the over-taxed citizens of rich countries, but also to the farmers and agri-business enterprises in poorer countries.

From someone in a poorer country (the Philippines) writing about these things, some people in rich countries might train the gun back and say, "now, look who's talking!" But precisely the main reason why our country is poor, is because of the same high government interventionism, high and multiple taxation, over-regulation of labor laws and entrepreneurship, that many of our people are poor and unemployed.

Taxes in Welfare States

Many people, ordinary citizens and government leaders alike, in the poorer countries, envy the "free education, free hospitalization, long paid vacations, generous unemployment benefits,..." of many welfare states of Europe and other rich economies. I don't know if they also realize that maintaining a welfare state is very expensive for the taxpayers. After all, government has nothing to give to people except what it takes from other people.

Below are some data I got from the IMF's Government Finance Statistics (GFS) Yearbook 2004. Revenue = taxes + social contributions + other revenues (fees, charges) and grants. The taxes (various forms of income and consumption taxes) comprise between 1/2 to 2/3 of government revenues. Many of these fees and charges are not called as taxes because they are only created by administrative orders, not by the legislature or the Parliament. Nevertheless, whether they are called taxes or non-taxes fees and charges, they have one thing in common: they are mandatory and compulsory payment to the government.

General Government Revenue as % of Gross Domestic Product (GDP), 2003 (unless specified):

Note from the above numbers that the US' welfare system is less taxing than those in Europe. In fact, the US' government revenues as % of GDP is nearly 1/2 of those in Denmark, Sweden and Norway. This partly explains why the US attracts more entrepreneurial people from many parts of the world, than Europe. But many Asian and Eastern European countries with smaller taxes and lesser government regulations are attracting more and more professionals and investors from both North America and Western Europe.